Real Estate Tax Strategy

The strategy decisions that compound across a real estate portfolio.

• 1031 Exchange and Cost Segregation

  How basis carryover, recapture deferral, and the exchanged vs excess basis split interact.

• Section 179 vs Bonus Depreciation

  When to elect Section 179 expensing instead of or alongside bonus depreciation.

• Opportunity Zones After OBBBA

  How OZ deferral interacts with cost segregation studies in 2026.

Frequently asked questions

Should I do a cost segregation study before or after a 1031 exchange?

Do the cost seg study on the replacement property, not the relinquished property. Under Reg. 1.168(i)-6, exchanged basis carries over into the replacement property. The reclassified 5, 7, and 15-year components on the excess basis (the new cash you added to the deal) qualify for 100% bonus depreciation under Section 168(k) after January 19, 2025.

Can I combine bonus depreciation with an Opportunity Zone investment?

Yes. The Qualified Opportunity Fund defers capital gain under IRC Section 1400Z-2, and the underlying Qualified Opportunity Zone Business Property gets its own depreciation schedule. A cost seg study on the QOZB property reclassifies 20% to 40% of basis into shorter recovery periods eligible for 100% bonus under OBBBA. The QOF gain deferral and cost seg deductions stack.

When should I elect Section 179 instead of bonus depreciation?

Elect Section 179 when the annual limit ($1.16M for 2025 with a $2.89M investment phase-out) fits your basis and you need to allocate expense to specific assets. Bonus depreciation under Section 168(k) has no dollar cap after OBBBA restored 100%. Section 179 cannot create a net operating loss under Section 179(b)(3); bonus depreciation can.

How does the STR loophole change the depreciation calculation?

The STR loophole under Reg. 1.469-1T(e)(3)(ii) makes a short-term rental with average customer stay of 7 days or less a nonpassive trade or business. Cost seg losses on the property then offset W-2 or other active income directly. Depreciable life stays at 39-year (nonresidential) because average stay under 30 days classifies it as transient use under Reg. 1.469-1T(e)(3)(iii).

Does a Delaware Statutory Trust interest qualify for cost segregation?

Yes, at the trust level. Under Rev. Rul. 2004-86, a DST is treated as a grantor trust with beneficial owners each holding an undivided interest in the real property. A cost seg study on the DST-held property allocates the reclassified deductions to beneficiaries pro rata via Schedule K-1. The 1031 exchange path into a DST preserves the exchanged basis rules.

What is the interaction between bonus depreciation and the QBI deduction?

Section 199A allows a 20% qualified business income deduction on rental income from a trade or business under the safe harbor in Rev. Proc. 2019-38. Bonus depreciation lowers QBI in the year taken, reducing the current 199A deduction. In later years without bonus, QBI is higher. Model both years before electing out of bonus under Section 168(k)(7).

How do passive activity loss rules interact with cost segregation?

IRC Section 469 suspends rental losses against active income unless the taxpayer qualifies for the STR loophole under Reg. 1.469-1T(e)(3)(ii) or REPS under Section 469(c)(7). Suspended PALs release when the property is sold in a fully taxable disposition under Section 469(g)(1)(A). A 1031 exchange does not release suspended losses; a sale does.